List of Articles

Fundamentals driving silver to outpace gold in investment portfolios

by Wayne Cheveldayoff, 2006-03-09

Investors interested in precious metals may want to include some silver as well as gold in their portfolios because the underlying fundamentals suggest that the silver price may rise even faster than the gold price in the future.

Gold is the favourite of those seeking ‘hard money’ to preserve the value of their wealth, but silver also has a long history – thousands of years – of playing that role.

Silver’s status equal to gold was confirmed by the Canadian government in February 2005 when it approved both as eligible investments for RRSPs and RRIFs.

In the case of both gold and silver, what investors buy for RRSPs has to be, according to the Canada Revenue Agency, acquired from either the producer of the metal or a regulated financial institution and can be “investment-grade gold and silver bullion coins and bars, and certificates on these investments….The gold must have a purity of at least 99.5 per cent and the silver a purity of at least 99.9 per cent.”

As the gold price has climbed steadily from $275 (U.S.) per ounce to more than $550 per ounce over the past five years, silver has more than kept pace, rising from $4.50 (U.S.) per ounce to just over $10 per ounce.

Part of the gain is due to the shortfall in the supply of silver. A recent silver update by CIBC World Markets analyst Brad Humphrey noted that world demand in 2006 is estimated at 923 million ounces while supply from all sources and regions of the world will be only 868 million ounces – a deficit of 77 million ounces.

Silver’s supply shortfall – ranging from 21 to 138 million ounces annually – has been around for more than a decade, gradually depleting above-ground stocks.

Some analysts claim that silver inventories are now so low that as demand continues to increase because of widening industrial uses, the price could soar.

Silver, for example, plays an important role in the electronics industry, such as for chips and plasma display panels. A 32-inch panel, of which many millions will be made, will use between 0.96 and 1.3 ounces of silver.

Even though the use in photography is drifting lower, jewelry use is strong and there is potential growth in healthcare due to its anti-bacterial and anti-microbial qualities, textiles, cell phone cases, soldering and brazing alloys, solar cells and wood preservatives, among many other products.

The recent upswing in the silver price above $10 (U.S.) per ounce was triggered by anticipation of new investment demand. Barclays Global Investors is seeking approval from regulators for a silver-backed exchange traded fund (ETF) similar to the Streettracks Gold Trust, an ETF traded on the NYSE under the symbol GLD with each share representing a tenth of an ounce of gold.

This gold ETF has been amazingly successful, with more than $6 billion in gold accumulating in the fund, because it makes investing and speculating in gold so much easier.

The new silver ETF is expected to also trigger heavy investment demand and thereby remove a relatively large amount of silver from the market.

With silver stocks low (there isn’t regular central bank selling as there is for gold) and with large short positions on silver exchanges, a surge of investment demand via a silver ETF could cause a mad scramble for the metal that could parallel the meteoric rise in silver during the late 1970s to $50 (U.S.) per ounce temporarily when the Texas-based Hunt brothers appeared to corner the market.

Until the silver ETF arrives (silver users are opposing its creation but are likely to lose), the easiest way for investors to hold silver is through certificates issued by a Canadian bank.

A recent check with the Scotia McLeod discount brokerage found it offered silver certificates backed by the Bank of Nova Scotia in a minimum size of 500 ounces, worth about $5,000 (U.S), carrying a minimum purchase or sale commission of $39.95 (U.S.) and a safekeeping charge of around 11 cents per ounce annually. The dealer’s buy-sell spread at the time was $10.09 bid, $10.36 offered.

One thing to note regarding certificates, in contrast to holding physical bars or coins, is that the investor would end up with nothing if the certificate-backing bank went bankrupt.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

The URL for this page is .

©2006 Wayne Cheveldayoff